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Inside the Market’s roundup of some of today’s key analyst actions

Though he maintains a “favourable” long-term view of Air Canada (AC-T), AltaCorp Capital analyst Chris Murray thinks its shares could follow industry trends and move “sharply” lower in the near term over concerns about the spread of Wuhan Coronavirus.

Shares of the airline fell over 4.5 per cent on Tuesday, tracking declines U.S. carriers that also fly to China as investor worries spread.

“The three most recent global epidemics including Severe Acute Respiratory Syndrome (SARS) in 2003, H1N1 Influenza in 2009 and an Ebola epidemic in 2014 provide in our opinion, a framework to guide our thinking about near-time share price performance,” he said. “[We compared the] relative performance .. of the S&P 500 Index, the benchmark U.S. index, and the XAL or US Airlines ARCA Index, which represents several larger U.S. airlines as well as several key global airlines for each of these periods. In the SARS, H1N1 and Ebola cases, shares on the XAL fell by 34.9 per cent, 47.7 per cent and 14.6 per cent from our baseline period, before retracing to be up 76.8 per cent, 42.9 per cent and 27.2 per cent on an absolute basis from the baseline respectively.

"While other epidemics, including the Zika virus in 2016 caused concern, we highlight that these larger scale epidemics can have a more pronounced near-term impact. However, once a better understanding of the magnitude of the spread and severity was understood, stock prices recovered quite sharply in all three cases within months.”

Mr. Murray said the impact of the virus does not “impair” his long-term thesis, leading him to maintain an “outperform” rating and $60 target. The average on the Street is $57.13, according to Bloomberg data.

“While we remain very positive on the mid- and long-term outlook for Air Canada share prices given the margin benefits we see from the Aeroplan integration, gains from the narrow-body fleet renewal program, the continued growth of sixth freedom traffic and ultimately ongoing improvements in key financial metrics including return on invested capital and free cash flow per share, in the near-term we would anticipate shares could follow these historical precedents,” the analyst said. “While this could present a short-term tactical issue current holders should be cognizant of and may need to address, we believe should these precedents hold, it also could create a highly attractive and opportunistic entry point for investors who have remained on the sidelines given recent top-decile share price performance as fundamentals in our opinion remain sound.”

Meanwhile, seeing catalysts ahead, Sscotia Capital analyst Konark Gupta thinks it’s “time to buy” Air Canada.

“Besides potential Q4/19 beat, we expect several catalysts this year,” he said. “(1) Boeing has deferred MAX ungrounding to mid-2020 (vs. January), which could positively impact investor sentiment given some concerns that yield could come under pressure due to overcapacity this year. FCF could increase in the near term as AC may again push out MAX deliveries. (2) AC has recently doubled the pace of daily buybacks, suggesting more aggressive buybacks year-over-year. (3) Leverage ratio is sitting below 1.0 times and will likely stay flattish or improve further, suggesting a strong probability of investment grade rating this year. With an investment grade rating, it would be interesting to see if AC announces a substantial issuer bid and/or initiates a dividend. (4) Forward Brent curve is inverted and Jet-Brent crack has pulled back despite IMO 2020 regulation coming into effect, which along with recent CAD rebound point to a fuel tailwind. (5) Transat acquisition is expected to receive regulatory approvals and close by mid-2020. We continue to expect AC to extract synergies that could more than offset any potential carve-outs. (6) AC could announce or receive compensation related to Boeing MAX, similar to a number of airlines that have recently announced settlements.”

Mr. Gupta raised his fourth-quarter EBITDA and earnings per share estimates to $738-million and 37 cents, respectively, from $701-million and 27 cents, citing better fuel/FX and buybacks than expected.

With a “sector outperform” rating (unchanged), he increased his target to $60 from $55.

“With the stock losing 6 per cent the past week and our target increasing 9 per cent, AC is back to our high-conviction list (top among quality liquid stocks in our coverage universe),” said Mr. Gupta.


Though shares of Estee Lauder Companies Inc. (EL-N) are currently “priced for perfection,” Citi analyst Wendy Nicholson expects a “potentially imperfect” outlook, expressing concern about the possible impact of the spread of the Wuhan coronavirus.

Accordingly, in the wake of "strong" outperformance that has seen its share price jump by over 60 per cent over the last 12 months, Ms. Nicholson downgraded its stock to "neutral" from "buy."

"With this performance behind it, the stock is now trading at 34 times our calendar 2020 EPS forecast, or an 80-per-cent premium to the market, which puts it close to its all-time high relative valuation," she said.

In a research note released Tuesday after the bell, Ms. Nicholson noted China represents 17 per cent of the company's fiscal 2019 sales.

"With Coronavirus impacting China in a seasonally-important period (right before Chinese New Year, when Chinese people tend to travel a lot), we think the impact of the outbreak could potentially be severe," she said. "And, while travel retail is generally a high-growth channel for EL (not just as shopping in travel retail locations is increasingly popular on a global basis, but as EL itself has gained market share in the channel in recent years), we think any slowdown in the travel retail channel could have a material adverse impact on EL’s sales and profits.

"Looking back historically, EL’s travel retail business has been volatile from year-to-year, and sometimes especially so quarter-to-quarter. .... We note that the weakest periods of growth for EL’s travel retail business were either owing to the events of 9/11 (which impacted fiscal 2002) the global recession (which impacted fiscal 2009) or to specific health issues (SARS in FY03 and MERS in FY15)."

Ms. Nicholson increased her target for its shares to US$230 from US$223 to reflect a higher market multiple, however she said there is not enough upside to maintain her rating. The average target is US$210.36.

“Previously, our target price of $223 was based on our forecast for CY20 EPS of $6.36, a market multiple of 17.5 times and a target premium of 100 per cent,” said Ms. Nicholson. “This 100-per-cent target premium represents EL’s peak valuation multiple (last seen in 2011) and reflected our optimism that our earnings forecast, while already ahead of consensus, had room to increase. While we are keeping our earnings estimates unchanged today, we now think there may be less room for upside, and are thus lowering our target premium to 90 per cent. However, given the current 19-times market multiple, we are raising our target price to $230. With only 7-per-cent upside from current levels, we think a Neutral rating is the right place to be for now.”


A “material” reduction in Spin Master Corp.'s (TOY-T) fiscal 2019 guidance adds uncertainty to its 2020 outlook and near-term thesis, according to CIBC World Markets analyst Robert Bek.

That led him to lower his rating for the Toronto-based toymaker to “neutral” from “outperformer.”

“The change reflects materially reduced management guidance for Q4, poor momentum and visibility into 2020, and the expectation investors will increasingly take a wait-and-see approach to the name given a number of negative surprises of late,” he said.

“Toy markets disappointed again in Q4, however the situation was made worse for TOY given company-specific issues with supply chain and distribution. The result is a materially lower EBITDA outlook, and likely additional pressures on costs into Q1 and beyond. The visibility for this space is weak in the best of times, and now has some added uncertainty, especially at this point where the big toy shows are still weeks away. This set up calls for more conservatism with our near-term thesis and targets.”

Mr. Bek dropped his target to $36 from $46. The average on the Street is $39.16.

“While the company’s challenges with operational efficiency are known, the company has not clearly indicated that the issues are fully behind it,” he said. Combining this with poor visibility and a highly volatile space adds an additional level of uncertainty to the story and argues for a more conservative view. We have made the obvious changes to Q4, and also walked down our profitability expectations for 2020 until better visibility appears after the New York Toy Show in a month."


Desjardins Securities analyst David Newman lowered his earnings expectation for Chemtrade Logistics Income Fund (CHE.UN-T) ahead of the release of its fourth-quarter results on Feb. 20, pointing to a decline in caustic soda and hydrochloric acid (HCI) prices.

Though he expects a recovery in the second half of 2020, his near-term view and recent share price appreciation led him to lower his rating for Toronto-based Chemtrade to "hold" from "buy."

“We expect results to be driven by: (1) continued weakness in Northeast Asia caustic soda and HCl prices, compounded by lost volumes due to the CN Rail strike; (2) some stabilization/rollover in merchant acid prices, offset by margin improvement from regen acid capacity rationalization; (3) higher selling prices for WSSC’s water treatment chemicals, with margin improvements augmented by more benign raw material costs; and (4) weaker specialty chemicals sales,” he said.

“In 2020, we expect caustic soda prices to recover in 2H, given the positive impact of IMO 2020 and other demand drivers (also impacted in 2Q20 by a scheduled turnaround of CHE’s North Vancouver facility), with HCl likely to benefit from a recovery in the energy markets. SPPC will have to manage through more turnarounds (eg a major turnaround at its Richmond, California, regen plant in 4Q). While merchant acid prices will likely remain stable/roll over, strong demand for regen and ultra-pure acid should continue into 2020. For WSSC, higher contract prices with municipalities and increasingly benign raw material costs should propel margins to similar levels realized several years ago. We are waiting for an update from CHE regarding the potential sale of selected specialty chemicals.”

For the fourth quarter, he lowered his pre-IFRS 16 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) estimate to $55-million from $61-million. His full-year 2019 and 2020 projections slipped to $334-million and $343-million, respectively, from $340-million and $355-million.

Based on his revised 2020 expectations, Mr. Newman also lowered his target price for Chemtrade shares to $11.50 from $12. The average on the Street ix $12.

“While we remain constructive on CHE’s longer-term outlook, we are taking a more cautious stance in the short to mid-term given the prolonged weakness in chlor-alkali and an elevated level of turnarounds in 2020, which is neutralizing a resurgent base of traditional chemicals in its SPPC and WSSC businesses,” the analyst said. “With more limited potential upside, we are moving to a Hold.”


RBC Dominion Securities analyst Christopher Carril expects Restaurant Brands International Inc. (QSR-N, QSR-T) to report “mixed” fourth-quarter results as Tim Hortons’ domestic struggles persist.

In a research report previewing earnings season for restaurants, Mr. Carril said he expects Tim Hortons’ trends to “be weak” with Canadian same store sales down 2.0 per cent, which is slightly higher than the 2.3-per-cent consensus on the Street. He expects Burger King’s momentum “moderating” with U.S. comps up 2 per cent, falling from a previous 3.5-per-cent estimate, which matched the consensus.

The company will see gains driven by Popeyes with the return of its popular chicken sandwich leading 15-per-cent comps south of the border, rising from 9 per cent previously and above the consensus of 13.6 per cent.

“The key focus will be on Tims, especially in light of recent management changes at the brand and its relative importance to consolidated,” said Mr. Carril. “We see shares de-risked to some extent heading into the Q given recent share performance (now the cheapest among the ‘allfranchised’ names) and lowered expectations for Tims.”

The analyst maintained an “outperform” rating and US$77 target for Restaurant Brands shares ahead of the Feb. 10 release of its earnings. The average is $77.17.

“Based on commentary from restaurant companies at the ICR Conference last week, we don’t anticipate news of meaningful shifts in overall industry trends/dynamics to emerge from 4Q results, and see investors generally continuing to favor fast food stocks vs. casual dining stocks into 2020,” he said. “Casual dining industry trends overall remain lackluster, with industry same store sales improving slightly sequentially (4Q estimated SSS up 0.3 per cent) and traffic remaining under pressure (down 2.5 per cent). Across our coverage universe, we see the most favorable risk-reward this earnings season in MCD (2020 EPS growth acceleration + 2021 FCF story coming into focus) and SBUX (continued momentum + potentially conservative FY20 guide).”


Echelon Wealth analyst Matthew Pallotta initiated coverage of a pair of publicly-traded US cannabis businesses with “buy” ratings on Wednesday.

He said Toronto-based Ayr Strategies Inc. (AYR-A-CN), a vertically integrated multi-state operator anchor portfolio in Massachusetts and Nevada, offers “growth opportunities at a compelling valuation."

“We view Ayr Strategies’ management, and particularly CEO Jonathan Sandelman, to be amongst the best capital managers of the teams we have studied to date,” he said. B"eyond the team’s considerable experience as financial managers, investors may look to the Qualifying Transaction as evidence of its acumen in this regard, as it has been the best-performing of all cannabis-related SPACs that we are aware of. Management has communicated that it will only acquire operational, EBITDA-positive business as it expands its presence into new states. The team’s track record and approach to capital allocation suggests they are as well positioned as any to execute this strategy effectively, and drive value creation for shareholders over the long term. "

Mr. Pallotta set a $22 target for Ayr shares, which falls below the consensus of $23.53.

At the same time, he sees Tallahassee-based Trulieve Cannabis Corp. (TRUL-CN) possessing the potential to replicate its success in other states.

“The company is a unique case study within the universe of publicly-traded U.S. cannabis businesses,” he said. “Its differentiated strategy of ‘depth’ versus ‘breadth’ of market presence has seen it establish an unrivalled share of the Florida medical market (50 per cent of volumes), and sales and EBITDA generation in line or higher than many of its 10+ state MSO peers, while deriving more than 90 per cent of its business from a single state. Local economies of scale have allowed it to post industry-leading margins, high returns on invested capital and positive operating cash flows (after tax and interest), making it one of the lower-risk investment options amongst its MSO peers, in our view. Decisions to continually reinvest capital to maintain its advantage in its home market, and its conservative approach to new market entrance both reflect management’s discipline in strategy and capital allocation. We believe this positions Trulieve well for preserving and creating value for shareholders over the long-term.”

Mr. Pallotta set a $21 target for shares of Trulieve. The average is $26.41.


Seeing it is “well positioned within its industry to capitalize on a number of macro and business level opportunities," Echelon Wealth analyst Douglas Loe initiated coverage of Kentucky-based Protech Home Medical Corp. (PTQ-X) a “buy” rating.

“The firm has previously endured several changes on the regulatory front, most notably with Medicare’s bidding process for DME [durable medical equipment] items,” he said. “In prior rounds of the bidding process (the bid process remains in hiatus until 2021), suppliers have endured several cuts to existing DME items, and with smaller players ultimately exiting the industry due to unsustainability. Protech has not only endured past changes, but has also commanded average margins of more than 70 per cent in the two most recent years. With the latest changes to the bidding process coming into effect in 2021, we believe that (1) the finalized pricing changes will not be subject to substantial cuts, and (2) Protech will be well positioned to adapt to any changes.”

He set a target price of $2.50 per share. The average is $2.80.


In other analyst actions:

PI Financial analyst Gus Papageorgiou lowered Shopify Inc. (SHOP-T, SHOP-N) to “neutral” from “buy" with a target of $590, rising from $592.33. The average on the Street is $502.22.

Tudor Pickering analyst Matthew Taylor cut TC Energy Corp. (TRP-T) to “hold” from “buy” with a $71 target, which sits 38 cents below the consensus.

National Bank Financial analyst Shane Nagle raised First Quantum Minerals Ltd. (FM-T) to “outperform” from “sector perform” with a $16 target, rising from $12.75. The average is $16.26.

TD Securities analyst Arun Lamba assumed coverage of Sabina Gold & Silver Corp. (SBB-T) with a “speculative buy” rating and $2.75 target. The average is $3.02.

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